Hedged Japan funds rose 0.7% as the yen fell; VGK dropped 1.8%

The Federal Reserve on Wednesday, September 16, raised its funds-rate target by a quarter point to 3.75%–4.00%, its first increase since 2023. On Friday the Bank of Japan, by a 7-2 vote, said it would guide the uncollateralized overnight call rate to around 1.25%, effective September 24. Invesco CurrencyShares Japanese Yen Trust CFXY, which holds yen, fell 2.01% through Friday's New York close, September 18. The federal funds target still sits 2.50 to 2.75 percentage points above the Bank of Japan's call-rate guideline.

The Nikkei 225 rose 1.57% last week in yen, from 64,011.34 to 65,018.95. A dollar holder of Japanese stocks did not receive that week. The iShares MSCI Japan ETF AEWJ, which holds Japanese shares and leaves the yen unhedged, fell 1.58%.

The funds that strip the yen out of the return went the other way. WisdomTree Japan Hedged Equity BDXJ rose 0.70%. iShares Currency Hedged MSCI Japan CHEWJ rose 0.67%. The gap between BDXJ and AEWJ was 2.3 percentage points, and it was the currency.

Last week the yen did the opposite: unhedged Japan funds finished higher even as Tokyo's local index fell.

The hedge flipped the sign; BDXJ is not the Nikkei

Hedging did not invent a different stock market. It removed a currency that was moving against the dollar. BDXJ still trails the Nikkei's local 1.57% because it is not the Nikkei: it tracks dividend-paying Japanese companies that derive less than 80% of their revenue from Japan, then hedges the yen. The hedge is what flipped the sign.

AVGK fell 1.77% as the euro slipped to $1.1460

European stocks fell in local currency, then lost more in dollars. The STOXX Europe 600 dropped 0.57% in euros, from 639.10 to 635.45. The Vanguard FTSE Europe ETF AVGK, which holds developed European stocks and leaves the currencies unhedged, returned -1.77%. Most of that extra gap was the euro: the ECB's dollar reference rate moved from $1.1592 on September 11 to $1.1460 on September 18, a 1.14% decline. Invesco CurrencyShares Euro Trust BFXE, which holds euros, fell 0.95%.

The eurozone pair isolates the hedge. iShares MSCI Eurozone AEZU fell 2.08%; iShares Currency Hedged MSCI Eurozone DHEZU fell 0.88%. Hedging saved 1.2 percentage points, in line with the euro's own week.

London showed the same currency hit without a falling stock market. The FTSE 100 rose 0.08%, from 10,650.44 to 10,659.13, and iShares MSCI United Kingdom BEWU still fell 1.40%. Invesco CurrencyShares British Pound Sterling Trust BFXB fell 0.95%. The CAC 40 dropped 1.40%, from 8,179.77 to 8,065.02; iShares MSCI France BEWQ fell 2.72%.

AVGK went ex-dividend on Friday, $0.2224 a share, payable September 22. The price fell 2.01%; the total return of -1.77% is what a holder earned. Over one month the fund is down 4.12%.

The broad developed-ex-US wrappers sat between the two poles and inherited both currencies. Vanguard FTSE Developed Markets AVEA returned -1.56%. iShares MSCI EAFE BEFA fell 1.62%. iShares Currency Hedged MSCI EAFE CHEFA fell 0.34%. Xtrackers MSCI EAFE Hedged Equity CDBEF fell 0.47%. Hedging the EAFE book saved about 1.3 percentage points.

Yen-hedged Japan funds were the only equities that finished the week higher. Unhedged Europe and Japan funds fell together in dollars.

The year has not flipped with the week. AEWJ is still up 20.8% for 2026; BDXJ is up 24.6%. AVGK is up 7.7%, and the eurozone hedge, DHEZU, leads its unhedged twin by 4.2 percentage points. AVEA is up 15.4%, between those Japan and Europe results: Japan is its largest country weight, 20.9% as of August 31, and it also holds Canada, Korea, and the rest of Europe. CFXY is now down 0.32% year to date: September's yen bounce, the whole of last week's column, is gone. The hedge that paid last week on a rising yen paid this week on a falling one. That is the product, not a verdict on Tokyo.